3 Laws of Investing

Ignorance of the law they say is not an excuse, this same rule is applicable to investing.  I use to pity people whenever they talk about investing when they actually know nothing about it, especially when they lose their money. Many thought investing is like saving money in the bank which they can withdraw at will without knowing they can invest and really lose all their money. 

What is investing all about?

The term investment is a very broad term and may not be easily comprehend just like any other subject.  Investments also do not have a definite definition because people use it at deferent levels and on different situations. How Warren Buffet, the richest investor in the American stock market will define investment will be different from how a man on the street will define it.   

Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in form of interest, income, or appreciation of the instrument. 

Exchange Traded Funds (ETF)

An exchange traded fund is meant to give the same return on investment as a correlating index without costing the investor so much. ETF’s are index-based investments that give a performance based on a correlating index. To understand ETF’s we must first understand indexes.

An index is a collection of stocks that represent an industry. The OSX, for example, is a collection of shares from several oil companies. This is a good investment because you generally want to diversify your portfolio. In other words you want to buy from several different companies rather then a few because you run less risk of losing money. Several companies are less likely to fail then a handful of companies. Don’t put all your eggs into one basket is the basic mindset behind diversification. The problem is that you will need to buy a few hundred shares in about fifteen different companies. That is very expensive and the commissions on all those buys adds up.

Certificate of Deposit

Few think about a savings account as a loan to the bank, but it is. You give the bank access to your funds in return for a growing interest rate. The more you save, the longer you leave the money in the bank, the more money your money makes. The bank can afford to do this because it invests your savings and uses them to make more money. This is why problems occur when many people withdraw their funds. The bank doesn’t have enough liquid funds to produce the exact quantities the customers will ask for.